Can't get a loan because of bad credit score? The best and worst places to get 'alternative credit'

If you're in need of cash but have a shabby credit record that means you keep getting rejected by High Street banks, do you know where to turn next?

Research published this week revealed that payday lenders are the most well-known among alternative credit providers, who provide loans or credit cards to people who would otherwise be turned away by mainstream lenders.

But though payday lenders are the best known, they are far from the cheapest, as the alternatives below will show.

Whether you need to consolidate other more expensive debts, want to improve your credit score, or even get credit at better rates than those offered on the High Street, then here are some of your options...

Struggle: Many are left not knowing whether to turn after being rejected for credit by mainstream lenders.

Credit unions

How do they work? Not-for-profit, community-based co-operatives that provide savings and lending products for their members.

Pros: Loans limited by law to 26.8 per cent APR on a reducing balance. Rates on loans will often be cheaper than many credit cards, while savings rates at bigger unions can sometimes beat High Street banks. Community based, so you're more familiar with your bankers, and tend to have more flexibility than banks when providing loans. Also provide guidance to those members who are struggling financially.

Cons: Choice. Unions can be set up based on geographical location, or they can be workplace, industry or organisation groups, like churches. This means you can generally only become a member if you fit the criteria, making it difficult to shop around. Some also require you to have a savings account before you can borrow.

Purpose: Some credit cards are designed to help you build up credit scores by showing you can pay your bills on time.

Credit cards to repair your credit score

How do they work? We're talking here about credit cards which are designed for people with poor credit ratings. These are provided by some of the traditional credit card companies but also specialist providers.

They tend to have low credit limits and are intended as ways for those with poor credit histories to build a track record of better borrowing behaviour.

Pros: Lower rates of interest than other forms of alternative credit, though dearer than credit unions. Some products reduce the interest rate the longer you use the card, provided you pay off your bills on time. If used responsibly, you build up a better credit score that makes it more likely you'll be accepted for cheaper credit.

Cons: Not balance transfer cards, so not useful when it comes to paying off debts. Credit limits will be strict, so not much use if you need more than that. As the APR is Representative, you may end up with an interest rate higher than that advertised. Can come with fees of 3 per cent on cash advances, such as using an ATM or buying foreign currency.

How do they work? Loans for people with bad credit histories who are being turned down by mainstream lenders. Loans are typically secured against the value of your property.

Pros: Loans can be for larger amounts (up to £100,000) and over longer periods (up to 30 years) which can be useful for people looking to consolidate a variety of very expensive debts. Interest rates typically lower than payday and guarantor loans, and bad credit cards.

Cons: Not good for short-term borrowing and borrowers must be homeowners. Generally thought of as being a move of 'last resort' as the loan is taken out against the value of your home, which could end up being repossessed if you default. Longer-term loans can leave you paying back more than twice what you borrowed as interest mounts up. Interest also variable, not fixed, so could change mid-term.

Risk: Taking out a bad credit loan will typically mean you have to put up your house to secure it.

Guarantor loans

How do they work? They give loans to people with poor credit ratings, with family members or friends with better ratings acting as guarantors to pay the debt off if customer defaults.

Pros: Can borrow small amounts, from £500, at a vastly cheaper rate than payday lending. Can borrow up to £5,000 which could help if you have rolled over payday loan debts. Having a guarantor makes it more likely you will be accepted for a loan where High Street lenders would reject you. Some allow you to repay early without charging you early repayment fees.

Cons: Interest still high compared to other forms of alternative credit. With minimum loan terms of a year, the amount you repay can be pretty hefty, although you can pay it off early. Having a guarantor means that they can be chased for the money in the event you don't pay your debts. Interest variable.

Warning: You shouldn't take out payday loans if you know you can't pay them back within a month, nor use them to service other debts.

How do they work? Short-term loans typically of up to £400 provided generally for a maximum of 30 days, designed to bridge the gap until payday if you find yourself short.

Pros: Fast process, decisions can be made within minutes and money appears in account soon after. Due to small amounts that can be loaned, it is aimed at those who find themselves short until payday. The high cost means such loans should only be a one-off and you should be confident you can pay it back on time. They should not be something on which you're reliant on a monthly basis, and definitely not to service other debts.

Cons: Interest rates are astronomical, even if a loan is only taken for a month, with tight margins you may find it difficult to repay. Loans are allowed to 'roll over' from month to month, sending your debts even higher. Other lenders may turn their nose up if they've seen you've taken out a payday loan, even one paid back on time. Industry is fraught with irresponsible practices, with a third of firms probed by the Office of Fair Trading recently shutting down since investigation was launched.

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